Davies tells Anglo-Saxon economies correction must be long and painful

The World Economic Forum in Davos, Switzerland. Photograph: Michel Euler/PA

Clearing up the mess caused by the world financial crisis will involve people in Britain getting poorer, Sir Howard Davies, the director of the London School of Economics, said today.

Speaking in Davos, the former head of the Financial Services Authority warned that correcting the global imbalances that helped cause the market mayhem would prove painful for those countries that had run up big balance-of-payments deficits and built high levels of personal debt.

"In the United States and the UK people are going to get poorer," Davies said. "They are going to have to spend less than their income for a while as the economy deleverages. That is going to be politically extremely painful."

In the build-up to the crisis, countries such as the US, the UK and Spain spent more than they earned while creditor countries such as China, Japan and Germany built up large current-account surpluses.

"The Anglo-Saxon economies, of which Spain is an honorary member, need to bring up their savings rates and consume less over a period," the LSE director said.

He added that it would be far better if this process took place gradually over a lengthy period rather than with "a great grinding of gears".

The session on the opening day of the World Economic Forum in the Swiss Alpine resort was part of an attempt to identify the causes of the problems that have taken the global economy from boom to bust in the last two years.

Davies said that the global imbalances were only one of the causes of the crisis. Lax monetary policy by the US Federal Reserve, regulatory failings and incentive packages for financiers that encouraged excessive risk all played a part.

Steps taken to boost demand in countries such as Britain and the US – slashing interest rates, cutting taxes and boosting government spending – could make the global imbalances worse, the Davos panel agreed. Davies said it was vital that countries collaborated to solve the problem, adding that China should be "brought into the tent of global policy making".